The young stem cell industry could soon be stung by changes in the US patent system. As stem cell companies struggle to establish strong patent portfolios, legal uncertainty threatens to raise the cost of patent applications dramatically and scare away investors.

Two recent Supreme Court decisions could weaken patent protection for common applications of stem cell technology. And the US Patent and Trademark Office (USPTO) has drafted plans to limit the number of claims and continuations that can be filed on a single patent. Its new rules would have taken effect on 1 November 2007 but for a legal challenge by the pharmaceutical company GlaxoSmithKline, based in London, that has resulted in a preliminary injunction against the USPTO.

To add to the uncertainty, there is a patent reform act on the legislative horizon. The Patent Reform Act of 2007, which has passed the House of Representatives but has not yet come before the Senate, would implement changes making the US patent system more similar to that in Europe. One reform would introduce a postgrant opposition system, which would allow challenges to be made without requiring expensive litigation. The bill would also grant patents to the first party to file an application, rather than the first to invent.

Taken together, the possible changes to the patent system “are probably the most dramatic that we've ever seen,” says Mark Ellinger, a principal in the Minneapolis office of law firm Fish & Richardson.

The looming changes are making all stem cell companies nervous, but will primarily affect the least mature ones. US stem cell industry leaders such as Menlo Park, California-based Geron, Advanced Cell Technology (ACT) in Los Angeles and Osiris in Baltimore probably won't have to make dramatic changes to their business strategy, says Ellinger. None of these companies responded to a request for comment on the proposed changes to the patent rules.

Tightening claims

The new USPTO rules would limit the number of patent claims in several ways. The so-called '5/25 rule' (for the maximum numbers of independent and total claims) caps the number of claims a single patent can make. Another set of proposed rules limits the number of times a patent can be extended, or 'continued'. Both would curtail patenting strategies commonly used by biomedical companies.

“Everybody was scrambling to figure out what kinds of new patent strategies we should adopt,” says Ellinger. The day before the new rules were set to take hold, a judge stayed their implementation, but a final decision has yet to be made, and companies are in limbo.

In some cases, fewer claims per patent could be a boon to stem cell companies, because it might make it easier to patent new cell types, says Allan Robins, vice president and chief technical officer at Novocell, a San Diego company working on stem cell-based tools and therapies. For example, the broad patents that have been standard fare until now might mean that technology for deriving neural stem cells from embryonic stem cells, say, would infringe on technology for deriving the same cell type from fetal brain tissue. Robins believes that procedures requiring different source materials require separate intellectual property (IP). “I'm hoping that the new rules will force people to narrow claims so they're not claiming everything else in the world.”

It's a whole new world of uncertainty. Ken Taymor, executive director of the Berkeley Center for Law, Business and the Economy

Allowing fewer claims per patent will make establishing IP portfolios more expensive, however. And added costs hit early-stage industries particularly hard. Not only are more patents being filed, but also the applicants have less cash to spare.

Michael Haider, president and chief executive officer of BioE, in St. Paul, Minnesota, which provides stem cells from cord blood for medical testing, thinks that limiting the number of claims and continuations is “particularly onerous in a stem cell environment,” where new characteristics of existing stem cells are constantly being discovered. “I think it's going to have a huge impact,” he says. “There isn't any way around the fact that this is going to cost all of us a lot of cash to deal with. Most patent applications have north of 50 claims.”

Robins agrees. “The ability to file continuations and get continuing coverage and additional value from your IP is a big part of any small biotech company's value,” he says. He predicts that approval of the new USPTO rules will force Novocell and similar companies to file smaller, more discrete patents. They will also be less able to wring further specifications from a patent by filing multiple continuations.

Even patent applications that were filed under the old rules could fall into disarray. “To the best of our knowledge, there's no grandfather clause” in the current version of the proposed rules, says Haider.

Obviousness is not obvious

Technologies are patentable only if they are not 'obvious'. Historically, 'obvious' meant ideas that had been specifically suggested in previous articles or other public disclosures. But in April 2007, in the case of KSR vs. Teleflex, which involved improvements to an automobile's gas pedal (accelerator), the Supreme Court added a 'common sense' provision about obviousness that remains to be interpreted in future cases. The obviousness argument is currently at the centre of a challenge to patents held by the Wisconsin Alumni Research Fund (WARF) on the derivation of primate embryonic stem (ES) cells, including human ES cells, based on the work of James Thomson, the University of Wisconsin researcher who first isolated such ES cells (see A patent challenge for human embryonic stem cell research). An initially successful challenge argued that Thomson's achievement was technical, not inventive, because he was applying known techniques. “One of the asserted arguments is that it was good work, but people had been making ES cells in mice for years,” says Ellinger. WARF appealed the decision, and the case is still current.

The malleability of stem cells presents additional ambiguity. For example, for poorly understood reasons, some patients experience improved heart function after a bone marrow transplant. If that is because the stem cells from the transplant differentiate into other cell types, patents on those cell types would be vulnerable to a challenge, argues Ellinger: scientists could argue that it is straightforward to identify the cells responsible for the improvements. “They might be novel, but are they nonobvious under the new KSR standard?”.

But at least one company executive welcomes the change. “It's always difficult to go back and [assess] what was common sense five years ago,” says Kristina Runeberg, vice president of business development at Swedish stem cell company Cellartis, in Göteborg. “It could be a two-edged sword, but I think there are a lot of patents that are obvious,” says Novocell's Robins.

Others, like Haider, aren't convinced that the Supreme Court decision will have a strong impact. “[Interpretations of obviousness] have always been a litigating point for any patent, and they'll continue to be.”

Disabling research tools

A Supreme Court decision in 2005, in relation to the Hatch-Waxman Act of 1984, also has implications for the IP rights of stem cell companies. The Hatch-Waxman Act permits companies to test generic versions of patented drugs for bioequivalence and submit an application to the US Food and Drug Administration (FDA) before the innovator's patent expires so that generic products can be brought to market sooner.

In 2005, the small biotech company Integra, based in Plainsboro, New Jersey, sued drug giant Merck for using Integra's peptides in drug discovery research. In this case, the Supreme Court interpreted Hatch-Waxman to imply that a company could gain an exemption if it could reasonably argue that the research might some day be used in an FDA application. As a result, some brand-name drug companies argue that they should similarly be able to infringe patents in order to assess the safety and efficacy of their own new drugs. That's disturbing news for stem cell companies that develop cell lines for research purposes, as just about any drug discovery or toxicity study using such cell lines could be used to support a drug application to the FDA (see New tools for drug screening).

The interpretation could make some research-tool patents worthless, says Ellinger. But the Supreme Court decision is unclear. Even though the Supreme Court said Merck could use Integra's peptides as a research tool, it stated that its decision didn't address the issue of research-tool patents.

“It's a whole new world of uncertainty,” says Ken Taymor, executive director of the Berkeley Center for Law, Business and the Economy in Berkeley, California. The problem is particularly pervasive in stem cell technology, he says, because much of the field's commercialization will be in tools.

Meanwhile, the current ambiguities could be worse than the restrictions for companies and lawyers trying to figure out how to structure patents. The problem could even make it harder for companies to raise money. IP is the main asset for technology companies, and these new patent laws make it harder to get a broad IP portfolio. “That's what investors invest in,” says Robins. The changes could be good for established companies, like ACT, Geron and Novocell, he says, “but it's not to the advantage of the field in general.”